Why Verizon Bought Terremark for $1.4B

Verizon has agreed to buy Terremark, a provider of managed and cloud services, for $1.4 billion, the communications company said on Thursday. Verizon (s vz), which already offers its own Infrastructure-as-a-Service product, as well as managed hosting for enterprise customers, will pay $19 per share for Terremark. For Verizon, the deal is an aggressive move to gain customers and clout in the red-hot cloud computing market, and makes sense in a world where the network element and the computing element are moving ever closer.

Om calls it comm-puting and vendors such as Cisco (s csco) and Hewlett-Packard (s hpq) are already providing the boxes that illustrate this philosophy at work, but Verizon is taking its commitment a step further, essentially doubling down the the cloud. Many service providers are trying to take advantage of the shift to the cloud by emphasizing their ability to control not only the computing infrastructure, but also the pipes between the customer and the cloud.

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AT&T (s T), Qwest (s Q) and Verizon all have cloud businesses, and Verizon even offers customers guarantees about how fast data will travel between one cloud and the other. Plus, if Verizon wanted to make a bold move as competition in the enterprise heats up (earlier this week HP announced that it would offer an IaaS product) now was the time to do it, before Terremark became too expensive.

Terremark, which competes with providers such as Savvis (s svvs) or Rackspace (s rax) to offer managed services and IaaS, has seen its shares rise by 71 percent from this time last year. However, Terremark’s shares,which closed today at $14.05, are still about half the price of Savvis’. Additionally, Verizon and Terremark are both big VMware (s vmw) customers, offering public clouds based on VMware’s vCloud tools. Verizon plans to operate the new unit as a wholly-owned subsidiary, retaining the Terremark name and with Terremark’s current management team continuing to manage the company. A Terremark spokeswoman says the Terremark executive team, including CEO Manny Medina, will stay in place, and the current business model will stay the same.

Verizon plans to commence a tender offer between Feb. 10 and Feb. 17, 2011, for all shares of Terremark common stock. The tender offer price constitutes a premium of 35 percent per share over today’s closing price. Verizon has already entered into agreements with three stockholders of Terremark to tender their shares into the offer, representing approximately 27.6 percent of the outstanding voting shares of Terremark. Verizon expects to close the tender offer late in the first quarter of 2011.